DALLAS -- There was a time when evaluating an airport revenue bond was as easy as studying the airlines that used the airport -- but not anymore.

With major carriers facing bankruptcy, extinction, or below-investment grade ratings and multibillion dollar losses, analysts face a complex new world in which the nation's airports will probably experience long-term uncertainty.

Even as airports continue to press forward with often costly plans to expand operating capacity, which they contend is necessary to maintain their long-term competitive advantage, the airline industry is contracting and pressuring airports to delay or drop capital projects that will increase the cost to carriers using the facilities.

"Everybody is approaching capital spending with more caution than before," said Ernie Perez, director and head of transportation ratings at Standard & Poor's Corp.

Richard Ciccarone, senior vice president and director of fixed-income research at Kemper Securities, said, "We're seeing airports in transition, and airports with heavy debt will be pressed in a competitive environment."

The changing economics for airlines has altered the way that rating agencies and other analysts view airport credits.

Changing of the GARB

Today, investment bankers and others familiar with the industry say that airports are entering an era in which specific revenues will be leveraged to pay for capital spending. Up to now, projects have customarily been funded with a general airport revenue bond, commonly known as a GARB, that is secured by all the airlines.

"Airlines are looking at all the costs of an airport," said Michael Boyd, president of Aviation Systems Research Corp. in Golden, Colo., a consultant to airports and airlines. "They are putting their foot down on anything that affects profits."

Few analysts expect the penny-pinching ways of carriers to change even when the airline industry returns to profitability. The reason is simple. Airlines that grew rapidly in the 1980s after the Carter administration deregulated the industry are now working to lower costs by cutting staff, reassessing the profitability of routes, paring back new plane orders, and pressuring airports to lower their costs.

"The 1980s were a period of adjustment to deregulation," said David MacDougall, vice president for transportation at AMBAC Indemnity Corp. "But now I think there's going to continue to be a shakeout in the airline industry. You'll begin to see carriers rationalizing every route on their spoke and hub system."

In the 1980s, airlines turned to the spoke and hub system in which large bases of operations were developed in cities such as Atlanta, Chicago, and Denver. From those airports, the carriers would route traffic in and out of smaller places to fill flights between their hubs. While the system helped carriers like Texas-based American Airlines rapidly expand market share, it also drove up the cost of operating.

Today, with air traffic flat and little growth expected, officials say that smaller hubs such as those in Nashville, San Jose, Calif., and Raleigh-Durham, N.C., may be in jeopardy. American said it is considering closing or scaling back operations at those mini-hubs after pouring millions into their infrastructure just a few years ago.

"There are going to be some airports that are left out," said Perez.

As a result, most analysts say it will be more critical than ever to focus on the local demand -- known as origination and destination traffic -- at an airport as a key credit issue. The reason: As long as an airport has people who need to fly, there will be an airline to serve them and pay user fees to the airport.

"We are confident the airports we insured will have a market," said Steven Citron, vice president at Municipal Bond Investors Assurance Corp., which last year was the leading insurer of airport bonds.

Other insurers agree.

"Aside from the consolidation of hubs, the effect [of the industry's retrenchment] on individual airports is really a matter of which airlines are serving there." said Steven Allard, director of the utility and transportation group at Financial Guaranty Insurance Co. "The [local] demand is still driving the economics of the airport."

While major airports will be affected, few expect the shakeout to be as great as with smaller hubs. "We are in a solid position," said Bruce Bohlen, assistant treasurer with the Port Authority of New York and New Jersey, which operates the three major New York City-area airports. "They have to use us."

Not every big city airport is as fortunate. At Hartsfield International Airport in Atlanta, 24 gates remain empty after Eastern Airlines went out of business. Even though the city has a highly competitive cost of operations for carriers, no one has been willing so far to enter the market in which Delta Airlines accounts for as much as 88% of all traffic.

"At the present time, our financial fate is inextricably bound up with Delta's," said Michael Bell, Atlanta's chief financial officer and a former airport finance investment banker. "That was all right before now."

Despite the lack of airline competition, the city next year expects to open a $230 million international concourse. A few years ago, carriers were anxious for the project to be completed, Bell said, but today "the pressure from the airlines to complete it by a certain date has lessened."

Analysts say that Atlanta is not alone, noting that airlines are using contractual veto powers and other measures to slow capital spending. Other carriers are pressuring airports to find ways to finance capital needs that would minimize increases in airlines' rents and fees that back airport debt.

Boyd, the consultant, predicts that airlines may block capital spending they believe is not necessary by threatening to impose special charges on customers at the offending airport, rather than absorb the cost throughout their route system.

Chattanooga Mausoleum

"An airline could say that if Chattanooga wants to build a mausoleum, then fine, we'll just charge your passengers for it," he said. Experts on airport financing say that airlines are increasingly pressuring airports to sell debt that requires little or no coverage. Traditionally, a general airport revenue bond has a minimum coverage of 1.2 times annual debt service, though many operate at 1.5 times.

"Airlines don't like paying coverage, they never have," said Carol Smith Canfield, first vice president at PaineWebber Inc.

The financial pressure on airlines is pushing many airports to find more economical ways of borrowing for capital needs. For instance, Smith Barney, Harris Upham & Co. expects to underwrite more than $400 million of bonds this summer to build an international building at John F. Kennedy International Airport in New York City. Plans call for the bonds to be sold by the New York City Industrial Development Authority.

In the past, such a facility would have been built with general airline revenue bonds paid for from all airport revenues and would carry standard coverages. However, the New York issue will be backed by pledges from five foreign carriers that will pay the debt. As a result, less coverage will be needed, said John Reagan, managing director at Smith Barney.

Others expect to see more attempts to leverage revenues such as the new passenger facility charge or even grants. The Washoe County Airport Authority in Nevada recently sold the first issue to be secured by a pledge of anticipated letter-of-intent grants from the Federal Aviation Administration. Those moneys have traditionally been used for pay-as-you-go financing, but airport officials lauded the deal because it enabled the airport authority to use expected grant moneys to expand its runways -- and operating capacity now.

PaineWebber's Canfield, who structured and underwrote the deal, said that other airports are interested in the structure. She declined to identify the airports.

While the Washoe County deal offered flexibility, analysts say it is an example of the increasing complexity of airport finance. Analysts at Standard & Poor's and Fitch Investors Service rated the issue, but Moody's Investors Service was not asked because it expressed strong reservations about leveraging grants that must be appropriated by Congress and can be modified by the FAA.

Adam Whiteman, vice president and head of the airport ratings group at Moody's, said the agency is concerned that bondholder security is diminished by the fact that third parties, including the FAA, control the revenue that would be used to retire the bonds. "This is a letter of intent, not letter of obligation," he said.

Just two years ago, federal officials projected that airports might spend $50 billion or more by 1995 to expand capacity and prepare for the future. Today, the plan still calls for aggressive investment, with FAA officials projecting the need for $6 billion annually in capital spending in each of the next five years.

Paul Galis, director of the FAA's Office of Airport Planning, said that the recession has only highlighted the different views that airlines and airports have on the need for capital spending.

"We don't see that as a conflict, we see it as a healthy tension," Galis said.

But airport finance experts say that airports are increasingly less ambitious about capital spending than they were two years ago.

"I haven't heard that kind of large number being kicked around recently," a Wall Street investment banker said. "I think airports are getting the hint, maybe a little late from the airline's perspective, that some projects shouldn't be done."

While multibillion dollar expansions are sometimes criticized, some analysts say the apparent contradiction of expanding airports and shrinking airlines can be explained differences in the long-term outlook of both.

"I've heard some airlines that have a five-year planning horizon, but for some airlines, it's a five-day planning horizon," Whiteman said. "But airports have a much longer-term plan of 15 to 20 to 25 years. They realize there are certain things they need to do to maintain their competitive advantage."

For many airport officials, that means pushing forward with expensive plans to build new runways, expand terminals, upgrade baggage handling systems -- all projects meant to relieve congestion that now costs airlines delays and money.

Certainly, debt sales have not slowed since the airline's troubles began three years ago. Last year, airport bond sales reached a record $7.3 billion, with 68%, or $4.98 billion, of that being new-money deals, according to Securities Data Co. The new-money amount was more than the sector total of $4.13 billion sold in 1991 for new money and refundings. Still, many believe new financing will level off.

"Projects that are definitely needed will get done," Canfield said. "Marginal ones may not."

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